Bank of Scotland owner Lloyds posts £2 billion profit but warns over war impact
“We remain focused on supporting UK households and businesses as they look to strengthen their financial positions and achieve their goals” – Charlie Nunn, CEO
Bank of Scotland owner Lloyds Banking Group has seen its profits jump by a third in the opening three months of 2026 as it benefited from interest rates remaining higher, but new forecasts show the conflict in the Middle East weighing on the UK economic outlook.
The banking giant reported a statutory profit before tax of £2 billion for the three months to the end of March, up 33 per cent compared with the same period last year. The latest first-quarter earnings figure came in ahead of the £1.8bn that most analysts had been forecasting.
The result was boosted by an 8 per cent year-on-year increase in underlying net interest income generated by the bank, meaning what it makes from loans minus what it pays out to savers.
Interest rates have been gradually coming down from a peak since 2024 but are currently held at 3.75 per cent, with hopes of a cut among borrowers dashed since the turmoil in the Middle East.
The group’s lending book grew with total balances up by more than £5bn.
Lloyds, which also owns Scottish Widows and Halifax, reported growth in customer activity with around 790,000 new savings accounts opened during the three-month period, while operating costs dipped following savings made by the bank.
Group chief executive Charlie Nunn insisted the banking group’s business model was “resilient in the context of the current economic uncertainties”.
He said: “We remain focused on supporting UK households and businesses as they look to strengthen their financial positions and achieve their goals.
“We are building strategic momentum during the final year of our current plan, providing innovative ways for our customers to manage their financial needs and achieve their financial aspirations.
“We are confident in our delivery for the year ahead and reiterate our guidance for 2026. We look forward to presenting our new strategy alongside the half-year results."
However, new economic forecasts published by the group reflect the possible “stagflationary consequences for the global and UK economies” of recent events including the conflict in the Middle East. Stagflation refers to rising inflation at the same time as slower economic growth.
Lloyds said it was now forecasting a slower increase in gross domestic product (GDP) and a rise in the unemployment rate, higher energy prices leading to renewed inflationary pressures, and cuts to interest rates expected to be delayed until 2027.
The revised outlook includes GDP being halved to 0.5 per cent for 2026 from the more than 1 per cent it was previously forecasting.
The UK unemployment rate is projected to rise to 5.6 per cent by the second half of the year, while consumer prices index (CPI) inflation could hit 3.9 per cent by the final quarter, according to the bank’s forecasts.
Lloyds’ finance chief William Chalmers said: “This is not a recessionary environment, to be clear. This is a slowdown in growth expectations versus where we were at the beginning of the year, caused by the Middle East conflict.
“It is against an expectation that that conflict de-escalates over the course of the year, which is essentially the same as the markets are assuming. In the event that that changes, obviously, we’ll need to look at it at the time.”
Chalmers also defended the bank’s higher profits in the context of the weakening economic outlook, saying that the “profitability of banks is an incredibly important component of a successful economy”.
He added: “You will see that, no matter what geography you look at, the most successful economies have profitable banks.”
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Nick Sherrard, managing director of Edinburgh-based consultancy Label Sessions, said: “Despite the challenging backdrop, Lloyds continues to demonstrate its resilience in this latest set of strong results. With interest rates likely to remain higher for longer and a lower-than-expected need to set aside capital to cover bad loans - which itself could be seen as a vote of confidence in the UK economy given Lloyds’ exposure to the market - the update could mean the bank now has the space to shape its own future.
“Innovation and new services will be crucial here, as Lloyds needs to find ways to genuinely engage with customers and create real loyalty. Lloyds Wealth is a huge opportunity, and a key test of its ability to embrace what’s next in financial services.”
Matt Britzman, senior equity analyst at investment platform Hargreaves Lansdown, noted: “Lloyds’ first-quarter update had a lot for investors to like, with the bank beating profit expectations while keeping its full-year targets firmly intact. Performance was helped by the structural hedge and steady lending momentum, while costs are being kept under control, and credit quality still looks resilient.”
Meanwhile, Santander UK has seen profits slump by 44 per cent at the start of the year after it set aside nearly another £180 million for the motor finance mis-selling scandal.
The high street lending giant reported pre-tax profits of £202m for the first quarter, down from £358m a year ago.
Profits were knocked by an extra £179m provision for motor finance compensation and increased costs in the first quarter, which brings its expected total bill so far for the mis-selling saga to £633m.
The group - owned by Spain’s Banco Santander - also booked a £73m charge for bad debts, up 40 per cent year-on-year, as it adjusted its outlook for the UK economy due to the Iran war, which it said will likely lead to higher inflation and weaker growth, as well as higher unemployment.
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